Price of GM stock too high, experts say

May 7, 2009

Price of GM stock too high, experts say

As June 1 deadline looms, outlook bleak for retirees, workers

BY TIM HIGGINS
FREE PRESS BUSINESS WRITER

As General Motors Corp. approaches a June 1 deadline to restructure, stockholders — including thousands of company retirees and workers in Michigan — are facing yet another painful hit, regardless of whether GM avoids bankruptcy.

Simply put, GM stock, a longtime blue chip that still traded at more than $20 a share a year ago, is overpriced — even at its Wednesday closing price of $1.66 a share, experts say.

The current price suggests GM is worth $1 billion — the price per share times the total number of shares outstanding.

But under restructuring scenarios presented by both GM and its debt holders, current stockholders would be left with just a 1% stake in GM. At $1.66 a share, that suggests GM is worth $100 billion.

Experts say there’s no way the new GM would be worth that much, which means the price should fall even more.

"I assume it will trade down aggressively as June 1 approaches," said credit analyst Kip Penniman.

Even GM’s employee stock program recently dumped its shares in the company.

John Milne of Saginaw has been a longtime GM investor and said he now expects to lose thousands of dollars.

While there’s no way to know how GM stock will perform long term, Milne said, "I can’t see the stocks recovering."

Debt plan may cut GM stock price

GM’s existing stock could be worth as little as 42 cents per share — even if just briefly — if the troubled automaker’s debt restructuring goes through as planned.

Under its restructuring plan, the automaker has launched an effort to convince unsecured debtors to trade $27 billion in debt for a 10% stake in a reconstituted automaker.

GM, which had about 610 million shares of common stock at the end of December, would issue more shares to those debtors. In all, GM said it would have about 60 billion shares as a result of the exchange.

That would severely dilute the value of GM’s existing shares, to an estimated fair value of 42 cents per share, according to a GM filing with the U.S. Securities and Exchange Commission last week.

"You would think that if they had to issue" billions in new "shares that the stock price would plummet, that essentially the equity is worthless," said Kevin Tynan, an analyst with Argus Research. "The dilution effect of them dividing up the equity of the company would at least indicate that the common shareholders have no equity value at all."

 

1 share equals 100

However, GM is also planning an immediate reverse stock split after it issues the new shares. Reverse stock splits reduce the number of shares issued and are done to increase the price per share proportionately.

GM is planning to offer one new share in GM for every 100 shares of the old GM. That would bring the number of GM shares issued back down to 610 million with the new shareholders from the debt-for-equity exchange included.

While the reverse stock split would boost the per share price, the overall value of existing shareholders’ investments would still likely decline as many more investors share a piece of the GM pie.

 

Caution is urged

Julie Gibson, a GM spokeswoman, declined to discuss the company’s current stock price, but cautioned not to read too much into the estimated fair value of GM’s stock after the debt exchange but before the reverse stock split.

"That’s an accounting estimate. It’s not like a real world estimate," she said. "That’s the value that’s being used to come up with these pro forma numbers. … It’s not a prediction."

However, Randy Paschke, chair of the accounting department at Wayne State University, said the figure can be used as a guide for what the stock could be worth.

"It shouldn’t be real far off," he said. "What they are really saying is that if somebody were to come in and want to buy the company, they would probably pay 42 cents per share."

Under GM’s new ownership plan, the federal government, which has lent GM $15.4 billion to stay afloat, would get at least half of the company. The UAW’s retiree health care trust would get 39%.

A counterproposal by bondholders would leave them with a majority stake in GM and the UAW trust with 41%. The government would get nothing.

In both proposals, shareholders would get 1%.

Some experts said that given the outlook for GM shares, their current trading price, of about $1.66 a share, seems high.

Kip Penniman, a credit analyst with KDP Investment Advisors, said he believes there are a lot of investors shorting GM stock — an investment practice that allows people to make money when a stock price goes down.

"Maybe investors got in at an average price far above the current level and just don’t care anymore — it may be such a small part of their overall portfolio," he added. "It doesn’t make sense to me."

Greg Miller, an associate accounting professor at the University of Michigan, said the share price could reflect investors’ belief that other options could emerge for GM than have currently been presented.

"None of these deals are final. … There is some chance that there will be a different plan," he said.

As GM’s stock price dipped to levels not seen since the Great Depression earlier this year, the automaker worried that a failure to see a rebound in its share price or a further decline could mean even more trouble for the struggling company.

Contact TIM HIGGINS: 313-222-8784 or thiggins@freepress.com

 

 

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